Computer Associates Finance Execs Enter Guilty Pleas

The former CFO and two other former finance executives of Computer Associates ( CA) pleaded guilty Thursday to criminal securities fraud in Brooklyn federal court. The trio also faces a civil suit filed Thursday by the Securities and Exchange Commission charging them with committing accounting fraud.

Ira Zar, former CFO of Computer Associates, pleaded guilty to three criminal counts -- obstruction of justice, securities fraud conspiracy and substantive securities fraud -- and faces up to 20 years in jail, according to U.S. attorney's office spokesman Robert Nardoza. David Rivard and David Kaplan, former vice presidents of finance at CA, pleaded guilty to obstruction of justice and securities fraud conspiracy and face a maximum sentence of 10 years in jail, Nardoza said.

The judge set a July 22 sentencing hearing.

"The guilty pleas today of Computer Associates' former CFO and two former senior executives in Computer Associates' finance department further demonstrate the corrupt culture in Computer Associates' management," Roslynn Mauskopf, U.S. Attorney for the Eastern District of New York, said in a prepared statement. "The pleas represent a major advance in our continuing effort to bring justice to those at Computer Associates who are responsible for committing securities fraud and obstructing the government's investigations."

All three men are cooperating with an ongoing investigation by the U.S. attorney's office, suggesting additional charges against other executives may follow. So far, CEO Sanjay Kumar, who was COO during the period in question, and former Chairman and CEO Charles Wang have not been charged, but at least one analyst has suggested Kumar should step down.

Computer Associates spokesman Bob Gordon said the company had no comment on the pleas.

Meanwhile, the SEC's suit filed Thursday alleges the former executives committed accounting fraud. The suit claims that the trio participated in a scheme in which they prematurely recognized revenue from software deals that had not yet closed, according to a release.

Without admitting or denying the SEC's allegations, Zar, Rivard and Kaplan have consented to an injunction with the SEC permanently banning them from serving as an officer or director of a publicly held company. But the SEC is still seeking a judgment requiring the trio to disgorge their "ill-gotten gains" and imposing civil money penalties.

Zar and Rivard were fired last year after an internal investigation -- sparked by external probes by the SEC and U.S. attorney's office -- found that the company booked revenue earlier than it should have. Kaplan left to "pursue other opportunities" in December.

According to the SEC, CA improperly held its books open at the end of each quarter in fiscal 2000, which ran from April 1, 1999, to March 31, 2000, and improperly recorded revenue from contracts that had not been executed before the end of the quarter. Both Zar and Rivard, the heads of sales accounting, backdated their own signatures, the SEC alleges. Rivard also knew that CA customers were backdating signatures on contracts, according to the SEC.

For all of the quarters of fiscal 2000, CA prematurely recognized more than $1.4 billion in revenue from at least 116 contracts that the client or CA signed after the quarter closed, the suit claims. At least 18% of revenue in the first quarter, 33% of revenue in the second quarter, 26% of revenue in the third quarter and 7% of revenue in the fourth quarter involved contracts not executed by CA or the company's clients by the quarter's end.

In fiscal year 2000, CA met or exceeded the Wall Street consensus estimate. But CA missed its earnings estimate in the first quarter of fiscal 2001, when the company refrained from recognizing revenue prematurely, and its stock plummeted more than 43% in a single day, according to the SEC.

The trio's guilty pleas come on the heels of another former CA executive, Lloyd Silverstein, pleading guilty to obstruction of justice in January -- the same day the SEC filed a civil complaint charging him with accounting fraud.

In its complaint against Silverstein, the SEC said some CA employees referred to the company's extended quarters practice as its "35-day month" because quarters were generally extended by at least three business days.

The period in question predates the move by CA to a new subscription revenue model under which it recognizes revenue incrementally over the life of a contract -- rather than upfront as it previously did. The period, however, followed a controversial compensation package in which CA's top executives received about $1 million after the stock reached a certain trigger point. Executives had to return some of that bonus in a separate legal action.

Shares of Computer Associates fell 14 cents, or 0.5%, to close Thursday at $27.77.